Aggregate Demand and Aggregate Supply

Aggregate demand (AD)

A schedule or curve that represents the relationship between the quantity of real GDP demanded in the economy and price level all else held constant

Quantity of real GDP demanded

The aggregate quantty of output (real GDP) demanded at a given price level; referred to as output

Aggregate expenditure (AE)

The sum of all expenditures made in an economy on consumption, gross investment, government purchases and net export In equilibrium, aggregate expenditures equals income, or real GDP

Autonomous consumption (A)

The level of consumption expenditue when income is equal to zero. Automsumption is fuded by drawing on savings or by borrowing

Real - balances effect

One of the three reasons that aggregate demand is downward sloping: When the price level rises the real value of savings falls and people are less willing or able to buy goods and services, thus reducing the aggregate quantity of real GDP demanded

Interest - rate effect

One of the three reasons that aggregate demand is downward sloping; When the price level rises, the demand for money increases, which causes interest rates to rise, resulting in a decrease in investment and consumption spending, thus reducing the aggregate quantity of real GDP demanded

Foreign purchases effect

One of the three reasons that aggregate demand is downward sloping; When the price levels rise the quantity of exports decreases nad the quantity of imppports increases, resulting in a decrease in net exports thus reducing the aggregate quantity of real GDP demanded

Income effect

The effect that a change in the price of a good, service or resourcs has on the purchasing poer of income. for example when prices decrease, the purchasing power of income increases and consumers are able to purchase more goods, services, or resources

Diminishing marginal quality

the negative relationship between the quantity of a good, service, or resources and the marginal utility obtained from each additional unit consume in a given time period

Substitution effect

The effect that a chage in the price of one good, service, or resource has on the demand for another. For example, an increase in the price of one good will incease the demand for its substitutes and vice versa

Increase in aggregate demand

An increase in the quantity of real GDp demanded in the economy at every price level; graphically, an increase in aggregate demand is represented by a rightward shift of the aggregate demand curve

Decrease in aggregate demand

A decrease in the quantity of real GDP demanded in the economy at every price level; graphically, a decrease in aggregate demand is represented by a leftward shift of the aggregate demand curve

Exchange rate

The rate or price, at which one currency can be exchanged for another

Appreciation (of currency)

An increase in the value, or price of one currency relative to another

Depreciation (of currency)

A decrease in the value, or price, of one currency relative to another

Aggregate supply (AS)

A schedule or curve that represents the relationship between quanity of real GDP supplied in the economy and the price level; Also called, short - run aggregate supply

Sticky wages

A situation where wages do not adjust in the short run. If wages are sticky downward, workers are reluctant to accept a decrease in their wages, creating a flat labor supply curve at the current wage.

Productivity

The total amount of output produced with a given level of inputs. For labor, it is the average amount of output produced per worker in a specific time period

Resource price

The price paid for, or opportunity cost of, using a resource such as land, labor, capital, or entreprenurial ability

Social institutions

The formal and informal “rules of the game” that society creates to provide structure to political, economic and social interactions

Long - run aggregate supply (LRAS)

The relationship between real GDP and the price level when all input prices are flexible. LRAS is represented graphically as a vertical line at the full-employment level of real GDP, Y

Full - employment real GDP

The level of real GDP produced in an economy when it is operating at the natural rate of unemployment. Also, the level of real GDP when the economy is in a long - run equilibrium

Sticky resource prices

The idea that resource prices tend to adjust slowly (be “sticky”) in response to changes in the market

Flexible prices

The idea that in the long run, resource prices are able to fully adjust to changes in the market

Long run

The time period in which all inputs of production can be changed

Short run

The time period in which at least one input of production is fixed, but other inputs can be changed

short - run equilibrium

A short - run situation in which the aggregate quantity of real GDP demanded is equal to the aggregate equilibrium occurs where the aggregate demand and aggregate supply curves intersect

Long - run equilibrium

A market condition in which firms do not face incentives to enter or exit the market and firms earn a normal profit. Generally, it occurs when the market price is equal to the minimum average total cost faced by firms

Recession

A decline in real output for at least two consecutive quarters

Expansion

A phase of the business cycle characterized by increasing real GDP, income and employment

Negative shock to aggregate demand

A change to one of the determinants ofaggre demand that causes a decrease in the aggregate quantity of real GDP demanded at every price level. Graphically, a negative shock is represented by a leftward shift of the aggregate demand curve.

Positive shock to aggregate demand

A change to one of the deterac igregate quantity of real GDP demanded at every price level. Graphically a positive shock is represented by a rightward shift of the aggregate demand curve

Negative shock to aggregate supply

A change to one of the determinants of aggregate supply that causes a decrease in the aggregate quantity of real GDP supplied at every price level. Graphically, a negative shock is represented by a leftward shift of the aggregate supply curve

Positive shock to aggregate supply

A change to one of the determinants of aggregate supply that causes an increase in the aggregate quantity of real GDP supplied at every price level. Graphically, a positive shock is represented by a rightward shift of the aggregate supply curve

Demand - pull inflation

Inflation that occurs due to an increase in aggregate demand

Cost - push inflation

Inflation that occurs due to a decrease in aggregate supply

Stagflation

When an economy simultaneously experiences both rising unemployment (a stagnating economy) and rising prices (inflation)

Phillips curve

The downward sloping line that represents the negative or inverse relationship between the rate of inflation and the unemployment rate in the short run